Google, Cisco don't collateralize loans

JohnShinal

SAN FRANCISCO (MarketWatch) -- Amid the market turmoil this morning, I'm having a flashback featuring headlines from Wall Street analyst reports written earlier this decade.

For about 18 months beginning in late March 2000, frantic tech analysts spent long hours writing lengthy reports on overpriced tech stocks. The arguments were often so defensive they seemed written for the sole purpose of convincing retail investors that all of the previous reports they'd written weren't filled with nonsense, or worse.

But of course they were, and all the detailed analyses based on confusion, illusion and fiction were overwhelmed by the reality of the Nasdaq slide that wiped out tens of millions of investor portfolios.

If you think "fiction" is too strong a word, remind yourself why former Merrill Lynch analyst Henry Blodget was barred for life from the securities industry, and why the biggest Wall Street investment banks eventually paid out billions of dollars in fines and settlement costs to the SEC and investors.

They did it because the SEC found that their research was filled with conflicts of interest, because the banks did business with the companies whose stocks they often touted. In many cases, the banks had taken the upstart firms public.

The report that triggered the flashback Friday concerned Countrywide Financial Corp., the nation's No. 1 mortgage lender, which said in a filing that the current lack of liquidity in the secondary mortgage market, if it persists, could pose a threat to its finances.

The company said the conditions of that market are "unprecedented." What's happened is that the investment banks, hedge funds and other investors who used to buy and package its home loans have virtually stopped doing business with them.

So great is the threat to market liquidity that the U.S. Federal Reserve and some foreign central banks have pumped more than $200 billion into them in the last two days.

Amid this turmoil comes a report from an analyst at, you guessed it, Merrill Lynch, which advises investors to accumulate the shares on any price weakness.

The report had a headline that read "media fanning the flames in an already skittish market" and argued that Countrywide "will ultimately benefit from the disruption, with fewer competitors and disciplined underwriting."

As proof of the company's strong position, the analyst cites the fact that Countrywide was able to buy assets of a smaller rival for pennies on the dollar.

Let me see if I've got this right: Merrill and other investment banks are no longer buying what Countrywide is selling, and a competitor in the same market has assets that are worth a fraction of what they valued them at not long ago, but Merrill analyst Kenneth Bruce is saying that now is the time to buy the company's shares?

All of this is a long way of saying that, in these times, any investor who buys a financial-services stock based on the opinion of an investment bank research analyst has to be mad. Countrywide
CFC, -4.49%
might well survive, but the risks of the business it is in are now being repriced, and five-year bull markets driven by speculative risk-takers take years to correct themselves, not weeks or months.

So what to do?

As someone who believes you should always pair dire warnings with hopeful advice, here's an idea about what to do right now:

This plug may come as a shock to readers who've read all the columns I've written over the last two years taking these companies to task for various reasons, including Cisco's failure to pay a dividend while its stock was moribund for years and Google's willingness to work with Chinese Internet police.

But let's face it, folks, we're talking about protecting your money right now, and these two companies are firing on all cylinders and operating in an industry that, compared to other sectors like retail, is less likely to be touched by the mortgage-led meltdown.

"Tech firms don't have much exposure to the subprime mess," said Romeo Dator, co-manager of the All-American Equity Fund from U.S. Global Investors. "In that sense, it is a safe haven," said Dator, whose $24 million fund owns Google and Cisco.

A lot of corporations and Internet service providers cut back on investing in technology in the wake of the tech bust and are still catching up, said Dator, whose firm manages $4.5 billion.

The other good thing about the tech sector is that it is mostly debt-free. If anything, tech firms are over-capitalized, which is why they've been using their huge cash piles to buy back stock during the last few years.

Tech firms don't have to borrow to fund their growth, which means they aren't likely to get hurt if corporate credit standards tighten.

Husic "isn't looking for these stocks to go up a lot until the smoke clears," but he does think they will perform well relative to other sectors.

It's true that consumer-focused firms like Apple could see some "knock-on effects" if a credit crunch restrains spending, Husic said. Yet he's confident enough in Cisco, which he's owned for more than two years, that he added to his position on Thursday.

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